Reuters Insider - Breakingviews: RBC's foray south

Citizens Financial (Delaware)

22/01/2015 19:59

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 Source:             Thomson Reuters                                   
                                                                       
 Description:        Jan 22 - Antony Currie and Reynolds Holding       
                     discuss the Canadian bank's $5.4 bln deal for U.S. 
                     lender City National and the chances RBC can make 
                     it in America after a prior flop.                 
 
 
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Transcript (May be auto-generated)

 Royal Bank of Canada is paying $5.4 billion for US lender City National, the 
so-called banker to the stars, with past clients that included Frank Sinatra and
Arnold Schwarzenegger. Antony, we've seen this movie before. This is, at least, 
the second foray south for RBC. The first one was a bit of a flop and we think 
this one's going to work- Yeah, it was. So actually, Royal Bank of Canada sold 
its US retail branches to PNC about three and a half, four years ago. Yeah, 
2011. Yeah, exactly. So for that, I think they got like $3.5 billion having 
spent a lot more for it when they got in over a decade ago. Okay, look, we went 
through the crisis, a lot of banks got hit, a lot of regional banks got in 
trouble as well as obviously the big guys on Wall Street that we saw. What 
they've done here, they've got hold of actually a very good well-run bank. It 
does well on various- 

Seriously, a rick clientele, a lot of wealth management business. Yes, exactly. 
And that helps when you get a lot of fee income, so you don't have to write 
quite as much on interest rates. Although, the bank is also very well geared to 
interest rate rises at some point, probably more than a lot of other banks. The 
cost of its deposits, what it pays simply to get us to get its money is 
basically worth 300 percentage point which is about 0.10% of what your average 
US bank pays, and that's in part because the way it's draft its business. So, 
and it fact it gives it just a much better ability when interest rates rise to 
do better- 

Do we know what went wrong with PNC over the past? Well, I mean, what it sold to
PNC? No, I think it was just- it bought the wrong one. What it says is we bought
the wrong kind of franchises and we didn't run them properly. I guess, one of 
the issues you've got with a lot of firms that come to America, you see this 
with British banks, or whatever. Look at Citizens Financial, that's still owned 
by Royal Bank of Scotland even after a spinoff last year. That has struggled 
after the crisis. A lot of regional banks have- or small-ish regional banks have
done so. So it's not particularly unusual, it's just they picked the wrong set 
of assets. And the US is attractive now for banking. I mean- It can be. There 
are some executives- some executives in Europe say, look, retail banking in the 
US is the best return on business you can get now. If you're in retail banking 
in Germany, that is very much- look, retail banking in Germany is a very, very 
low return business. There's a lot more banks there per capita than there are 
here for example. So, yes, US banks, in general, if you get the right franchise 
and a pretty good place. This one, though, look, it's got really high net worth 
clientele - although not exclusively, its loans are growing fast, like four 
times faster than the US average, deposit growth is growing - one and a half 
times US average. It's a good looking bank. The problem- two problems that Royal
Bank of Canada has, one, as you've alluded to, it's really got to prove that 
this time around, it's done well. And I think, look, purely on the franchise 
it's bought, it's got a better foundation. Secondly is the price. They're paying
a 26% premium which is okay if you can cover that with cost cuts, and they can't
do that. Cost cuts are worth about half- actually about a third, I think, of the
premium they're paying to shareholders at the moment. So what they're saying is,
look, the cost to deposits will give us more boost, which is probably true given
what we said about what it cost them. They're also relying on revenue synergies.
They're hoping this will generate more business than the two of them combined 
have got, which is possible but cross setting's never been easy for banks. Some 
do it. I'm sure these guys have managed some of it. Is it enough to cover the 
entire cost of the premium? Shareholders seem to be a little bit unsure but 
they're not as unhappy as they could have been. Okay. Well, we're going to see 
if this deal is a hit. In the meantime, stay tuned for more Breakingviews 
tomorrow